Blog › How Hackers and Regulators Are Causing Problems for Bitcoin Users

Alex Lloyd March 19, 2014

How Hackers and Regulators Are Causing Problems for Bitcoin Users

Bitcoins are an innovative form of digital currency. While the system as a whole can seem like a brilliant invention in today’s tech-driven age, there are many weak points and inherent flaws that mar the idealistic surface of the bitcoin system. Both unscrupulous cyber criminals and concerned government officials are causing snags that may slow bitcoins up or even bring the whole system down.

A bitcoin is a form of digital currency that you can use with participating individuals or businesses anywhere in the world. Transferring bitcoins from one user to another requires no transaction fees or credit card fees. This has made bitcoins a popular option with some small businesses looking for a cheap way to process transactions.

The value of bitcoins changes over time, and your bitcoins can have a different value on different exchanges. The largest bitcoin exchange is Mt. Gox Bitcoins, which began trading at less than $14 in 2013, then rose to a high of over $1,200 before crashing to $455, and ultimately stabilizing around $900.

Bitcoins are “mined” by computer systems performing complex calculations. The process of mining bitcoins becomes more difficult over time, so the system is set to eventually reach a maximum limit of 21 million bitcoins around the year 2140.

Weaknesses in the System

You can only access your bitcoins with your private key. There is no way to retrieve a lost key. Coins are not linked to your name or personal identity in any way. If you lose your key, you’ve essentially misplaced an equal amount of cash. You can’t go to a bank and ask them to replace the $100 bill you dropped, so you can’t seek assistance for a lost bitcoin key.

Your bitcoins are saved in a virtual wallet that you can store either on your computer or in a cloud. If you store your bitcoins in a cloud, they’re susceptible to online hackers who may access the server that’s holding your virtual money. If you store the bitcoins on your computer, you can lose them to a virus or to your own actions if you mistakenly delete them.

The Lure for Criminals

The bitcoin system has become very popular for criminals due to the fact that these virtual coins are not linked to any personal information. Users can exchange bitcoins with one another without ever trading names, email addresses, or other information. It’s very difficult to trace bitcoins back to someone. Both buyers and sellers who are engaged in illicit activities are sure to see the lure in this type of system.

Software Problems

The bitcoin system is far from infallible and recent discoveries have only highlighted how easily a major flaw can sneak in. It was recently revealed that hackers exploited a flaw in the programming known as malleability. This allowed double payments for a single transaction. Over 744,000 bitcoins are currently missing due to malleability theft. This accounts for about 6 percent of all bitcoins currently minted. The lost bitcoins are worth approximately $350 million at the current trading prices.

This isn’t the only error plaguing the bitcoin system. Another bug has given hackers access to bitcoins that should have been safely stored in a “cold” offline wallet. These secure cold wallets were inadvertently accessible through a leak in a hot wallet. The flaw has allowed hackers to steal bitcoins from the cold wallet for two years.

Money Laundering Allegations

In addition to the flaws in the bitcoin system, the company is dealing with legal weaknesses that make the system susceptible to crimes like money laundering. The CEO of the BitInstant bitcoin exchange, Charlie Shrem, is charged with conspiracy to commit money laundering and with operating an unlicensed money transmitting business. He allegedly sold over $1 million bitcoins to drug dealers on an underground site known as Silk Road.

The CEO isn’t the only user to succumb to the allure of money laundering through bitcoin. Two men in Florida unknowingly sold hundreds of dollars in bitcoins to undercover police officers over the course of a few months. The men were arrested in February 2014 and charged with operating an unlicensed money service business and money laundering.

Buying bitcoins is a lengthy process if you’re working online because you need to wait for secure wire transfers to process. This is why underground exchanges have become so popular, allowing anyone who has bitcoins to sell them for cash. Now that undercover police have gotten involved with these transactions, the bitcoin system may find that one of its last doors for operating illicitly has slammed shut.

The Regulation Question

Bitcoins are currently unregulated. This presents problems for both the government and for users. If bitcoins are lost or stolen, there’s virtually no mechanism for users to recoup their losses. Though bitcoins are available as a form of monetary exchange, they are not a safe replacement for a bank. If you store all your money in bitcoins, you could lose it in an instant. While the federal government protects the money held in banks, they offer no such protection or assurances for the virtual currency of bitcoins.

The government is concerned about the unregulated marketplace for bitcoins because it is difficult to apply proper taxation. Businesses that use bitcoins as a major form of payment may not report their taxes accurately, or at all.

While bitcoins seem poised on the verge of either success or failure, and may go either way, they certainly won’t be the only invention of their kind. Virtual currency is a popular concept that will only gain momentum as more businesses turn to virtual store fronts and online activities. For this reason, the government is keen to act now and put regulations in place that will keep both bitcoin and future virtual currencies running smoothly.

Bitcoin is teetering on a dangerous precipice and may fall quickly from grace, depending on how companies handle recent hacking issues. Consumers who have invested in this type of currency would do well to exercise extreme caution in their dealings.

About Alex Lloyd

Alex Lloyd heads AnchorFree's content department. Before joining the team, he was a former professional race car driver—competing in the Indianapolis 500 four times—and has spent the past decade writing content for major publications such as Yahoo and CNN.